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Monday, April 20, 2009

Investors - Taking Advantage of the Economic Downturn

The Investor’s CornerTaking Advantage of the Economic Downturn

by Ira Greene

Has your 401K become a 101K? Have you lost 40-50% of your stock value? What has happened to your investments lately? Many are concerned that they won't have enough money for retirement or to pay for their children's college? Watching the Dow Jones numbers go down is cause for concern. Is your investment advisor telling you not to worry? Stay the course and things will change and eventually you'll make it all back when the stock market recovers.There were stockbrokers in 1929 saying the exact same thing. Sit tight, the market will come back eventually. Had you bought and held back then you would have recovered and broken even again in 1955. Almost 26 years later! Could this be similar?

So what is an investor to do? What is the best advice in troubled times? This is the greatest credit crisis and economic downturn we will likely see in our lifetimes. Will it end as the governments of the world print money and try to stimulate the economies? Will the banks regain liquidity and the consumer once again start borrowing and spending? Will real estate values stop collapsing and our homes once again be our best investment?

My answer to these questions is an emphatic No! The real estate bubble which peaked in 2005, is in a major decline and most likely will lose another 25-40% over the next couple of years. The stock market is likely to head below 6000 and probably much lower over the next year. We may get one more good rally for one last bull trap to grab those few investors who think happy days will soon be here again. They’ll most likely commit their funds in a hopeless attempt to make back what they have lost.

The truth is harsh and unpleasant. Our system of debt-financing is just about finished. We are going to have to adjust to a whole new lifestyle. Can we still make money with our stock investments? Not easily. Unless you learn to trade like the professionals and sell short as well as buy long. If you're sitting there waiting for the recovery, I wish you luck. My suggestion is that on any large rally you liquidate and move to cash, because cash is king in a deflation. Your dollar becomes more of a value to you as prices start to drop in a recession (depression).

This may be difficult to hear and grasp. We want everything to work out and be nice. But our system of printing money and the creation of debt that we sell to the world through our Treasury sales has reached an impasse. Our dollar does not look too healthy in the long run. Would it be wise to buy gold right now? Well, a little wouldn't hurt. Maybe a bag of silver or two. It looks to me though, with overwhelming bullishness in the precious metals market that they have gone too high, too fast and it's time for a big pullback, so don't rush out to buy immediately. Be patient! To everything there is a time and a season. So where can an ordinary person put their money now?

My solution is to stop being an investor and become a trader or speculator. That's risky you say! The truth today is that almost all of the investing public is getting sheared right now and then run off a cliff afterwards. Traders don't fall in love and get married to their investments. They buy or they sell. The market goes up, they go with it. It goes down they go short and go with it. Yes, I am talking about making money when the market declines. You can make money both ways. No more attachments to a company's shares or a mutual fund. You begin to act like the majority of the smart money on Wall Street, doing exactly what the big guys do. They make money when the markets go down. So can you!

Where do I put my money? I trade the Forex, the foreign exchange market. It is a 2 trillion dollar a day financial market that works with international capital, the intersection through which global commercial and investment flows have to move. This is the true trader's market, which trades 24 hours a day and cannot be manipulated. The day starts in New York, moves to London, to Tokyo, then Austraila and back to the US. Open 6 days a week, currencies are exchanged to the tune of 10 to 15 times the size of all daily trading on all of the world's stock markets combined.

You may wonder how an average investor with just a few dollars can trade on an international market with banks, hedge funds, governments, and multi-national corporations. Money is moving at lightning speeds around the globe. Even though huge sums of money of commercial transactions are occurring every minute, the vast majority of these transactions are actually speculative in nature. Traders are buying and selling for short-term gains based on minute to minute, hour to hour, and day to day price fluctuations.

You can open a mini account with as little as $500 and start practice trading with no risk until you get comfortable. The bulk of currency trading is in the major currencies which represent the world's most developed economies. That means you'll be playing with US dollars, British Pounds, Japanese Yen, Swiss Francs, Australian and Canadian dollars. The liquidity in these markets is staggering.

Imagine you're the Toyota corporation and you sell 500 cars to Great Britain. You need to make sure you'll be able to convert those Pounds you get paid in to Yen. Because of the massive liquidity and buying and selling volume at any given moment, large trading volumes can be transacted with minor price changes and you can lock in the exchange. Traders make this environment of liquidity possible. This is much different from stock exchanges where it is less liquid and thinner, making prices move with extremes that hurt the investor.

Though it may seem complicated at first, it is not difficult to learn the Forex market. There is a learning curve, but imagine being able to trade at 2 am from your computer buying a currency and getting out 20 minutes later with a profit, all with the click of a mouse. Most firms will allow you to practice with play money till you get the feel of the actual market. Currencies trade in pairs with the first currency being called the "base currency" and the other currency being called the "counter currency". You are literally buying the base and selling the counter. The nice thing about this arrangement is that you can go long or short with the ease of a mouse click at any time of the day or night.

But wait you say... I'm too busy to do this with my hectic schedule. I need to leave my funds in the hands of a market professional. He will watch over my basket of investments with an eagle eye and keep me informed about what to do next. So, how's that working for you?

Ira Greene is a former stockbroker and former Certified Financial Planner who spent over 14 years at two large brokerage firms until he retired in 1995 to spend his time trading and following other interests. He trades full time from his computer at home. He will be teaching a class in Sebastopol on "How to Trade the Currency Markets" one night a week. Ira can be reached at 707-827-3442.